Tuesday, August 9, 2016

Conspiracy Theory?

From the Desk of Joe Rollins

I have to admit that the first seven months of 2016 have been a real roller-coaster ride. Twice during this period, we have had declines in the financial markets close to 10%. The first was the ugly selloff in February 2016 that was blamed on the experts’ opinion that the U.S. would fall into recession. Needless to say, they were wrong on that subject. The second one was brought on by the Brexit vote in the U.K. Experts came out and immediately contended that surely the world would end, and life as we know it would stop. They, too, were wrong. As we ended the month of July, most of the financial markets now sit at all-time highs. Not at an all-time high for the week, month or year 2016, but an all-time high for the history of the financial markets.

You see the strength of the U.S. economy everywhere around you, except in the government reports. In my opinion, there is an inconsistency that does not warrant the anemic reports that we get from the GDP. I am not sure whether you would call it a conspiracy theory or just a theory, but the visible strength in the U.S. economy compared to the strengthening U.S. economy that is reported seems almost unexplainable.

If you go back to the first of 2016, the so-called “experts” were promoting the fact that the U.S. economy had clearly stalled, and the world was in such dire financial state that you should hide under a rug for the rest of the financial year. They stated that you must buy non-investable assets, such as gold and silver, and sell off all positions to cash. How many times and how many articles have we seen that the Dow Jones Industrial Average would sink to 6,000 and bread lines would be forming in every major U.S. city.

To the contrary, there were those investors, such as myself, that said all of that is hogwash and you need to look around to see what the economy is like. As I have written in prior blogs, make a determination from what you see rather than what you hear. Believe me, I read all of the negative reports along with the positive reports, but the highs still tell me that the economy is fine and no recession is near. If you had followed all of the pundits’ negative assertions for the year 2016, you would have missed a very satisfying market trend.

For the month of July, the financial markets were nothing short of great. When least expected, the financial markets move up and the so called “market timers” are left wanting. Review the numbers for the month of July and you can see how excellent they were. The S&P 500 was up a very satisfying 3.7% for the month of July and up 7.7% for the year. The long-term averages have also improved with the one-year return at 5.6%, three-year at 11.2% and five-year at 13.4%. This is nothing short of spectacular, wherein we have averaged over 13% for the five-year period. The NASDAQ Composite was the real winner in July, up sterling 6.7% and year-to-date stands ahead at 3.8%. The one-year return is 1.9%, three-year is 13.9% and the five-year at an almost spectacular 14.8% per year, annualized. The Dow Jones industrial average, which only represents 30 large stocks, gained 2.9% in July and is up 7.4% for the year-to-date. The one-year return is 7%, three-year return is 8.6% and the five-year return at 11.5%. As you can see, these three major market indexes are all averaging double digits for the last five years.

Every day, we see people that sold their stocks in 2008 and never reinvested. For the last five years, double digit returns have made back all and substantially more than the money that was lost in 2008. In comparison, the bond index has lagged considerably behind over time. The July return was 0.6%, the year-to-date return is 6%, the one-year return at 5.4%, the three-year return at 3.1% and the five-year return at 3.4%. As you can see, the five-year return on the S&P 500 index is almost four times the return of the Barclays aggregate bond index.

Before I get into my specific comments regarding a conspiracy theory, I realize everyone is excited that it is back to school time. Therefore, I thought I would share with you some “first day” pictures of Ava from each year since she began school. Admittedly, they have all been preschool since she is only 5 years old, but I thought you would enjoy seeing these pictures leading up to her first day of kindergarten.

Age 2

Age 3

Age 4

Age 5

I have to say that it is hard to believe that the economy only grew 1.2% for the second quarter of 2016 and less than 1% in the first quarter. On Friday, the employment numbers were announced for July, with a net increase in employment of 255,000 new workers. That coupled with the strong report from June of 287,000 just does not follow with a weak economy as reported in the 1.2% increase in GDP.

You do not have to be a rocket scientist to see all of the cranes and houses being built in Atlanta. If you think business is not good, try to hire a contractor to do anything at your house for virtually any cost. I drive by Lenox Mall every day and note that the parking lot is full of potential buyers. I speak with clients every single day that mention it is hard to buy a house because the inventory is so low. In every aspect, whether at a store, your favorite restaurant or the mall, everywhere you look, business is robust. How is it consistent that the government continues to report very weak GDP numbers? As many of you know from reading my previous blogs, I am a firm believer that everything the government does is inferior to the private sector, except military and police and they do not do that very well. Virtually nothing the government does is as good as what private enterprise could do, if given the opportunity. I think that might be exactly what is going on here. If you need any evidence of our government at its worst, just go to the department of motor vehicles at any time for any reason and you will need no further evidence.

It was self-evident to me before writing this blog that the governmental numbers are not capturing actual reality.
It is my assertion that virtually everything that is happening in cyber space is not captured in the economic numbers as we see them. For example, I am an avid consumer but have not been to a mall in over 15 years. When I can order Ava’s toys from Amazon and in most cases get next day delivery, why would I ever go to the trouble of actually visiting a toy store? I can get what I want, when I want it, exactly as I need it, almost instantaneously. And since that is not a typical brick-and-mortar store, that information is not captured in the government’s numbers.

And while I know absolutely nothing about Facebook, I am completely amazed at the fact that they have over one billion daily visitors to their website. What company could actually talk to one billion visitors a day? However, they can basically offer a portal for one billion people to converse with their friends, simultaneously, all over the world, and not one single individual is involved. Do you really think the government captures that part of the economy?

While I am not assuming that there is any great conspiracy to the numbers of our government, I am fairly sure that the numbers as reported do not truly reflect the actual economy. Therefore, if the government reports 1.2%, exactly how comparable is that to the 4% reported in the 1980s when Ronald Reagan was president. At that time, there was no internet; everyone purchased from the local store and the capturing of information was relatively simple. Now with the electronic age, sales occur instantaneously and are reported to no one but the company itself. Therefore, I think if there is a conspiracy, it is due to the ineptness of our government and its inability to convert economic ratios to current events.

For all of those that argue that the economy is weak and a potential downturn will occur, just let your eyes give you the correct answer. As the saying goes, “Who are you going to believe, me or your lying eyes?”

While certainly the months of August and September have historically been bad months for the markets, it would only be a temporary setback. As the second quarter earnings continue to come in much better than expected, it looks like the third quarter might be a positive one for earnings in 2016. Undoubtedly, the third and fourth quarters will be up, which is a positive trend in earnings.

We are now enjoying negative interest rates in Japan and Germany. And just this week, England cut their interest rates to conform to the rest of the world. While certainly the U.S. may increase their rates modestly between now and the end of 2016, you may rest assured that rate increase will be modest due to distortion in currencies that an increase would cause. The Federal Reserve would not want to strengthen the dollar to the point of making U.S. exports noncompetitive and therefore hurting manufacturers even more.

In summary, maybe I have said this way too many times but it cannot be emphasized enough - Earnings are accelerating, interest rates are low (and will be low for a long time) and the economy is positive (and may even be growing). All of those components argue for higher stock prices going forward. Even though we are at all-time highs on the major market indexes, I certainly would not be surprised to see higher stock prices by the end of 2016 and certainly higher in 2017.

I am always amazed, troubled and completely confused as to why people hold so much money in cash. I know I have offended a lot of my clients over the years with my bewilderment at their decision to do so. When interest rates were normal, that might have made sense, but they are not normal and there are better ways to make the most of your cash.

One of the great parts of my business is meeting new potential investors almost every week. Sometimes I sit down with new investors three or four times a week. The standard questions I ask include, “What is your family budget?” and “What do you spend on a weekly and monthly basis?” In a rough estimate, I would venture to tell you that 90% of those people really have no idea what they spend on a monthly basis. They have no budget, and therefore cannot analyze it. Many young couples spend what they have available. If they have the money, they spend it; that is their budget. I encourage you to not fall under this category and actually prepare a budget. Most people I meet with do not even maximize their 401(k) contributions – they contribute but they do not maximize it. If they have available cash flow from their compensation, they find a place to spend it.

If you would like to sit down and discuss your budget, investments or any other items of interest, we are always available to meet with you. I understand that the flat market over the last year makes for a confusing time from an investment and financial standpoint. I can assure you I do not have all the answers and cannot explain the volatility of the market, but I do know that you cannot time the market, and being invested at all times is the best solution. After 40 years of studying the financial markets, I still learn something new every single day. Anyone who thinks they can understand investing on a part-time basis is really fooling themselves. Yes, they might outperform for a week, month, or even a quarter, but day-in and day-out, your investments are better served by professionals that do it full-time and are compensated for that service.

As always, the foregoing includes my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

Best Regards,
Joe Rollins